Economic woes deflate bond market

High inflation and bond yields lower than banks interest rates, as well as the decreasing value of the Vietnamese dong against the US dollar, have combined to derail recent Government bond issues, said Viet Nam Bond Market Association vice chairman Trinh Hoai Giang.

Viet Nam’s bond market had great potential, but economic instability was restraining its development, negatively affecting both investors and Government plans to raise capital, said Giang.

In March, three Government bond auctions worth a total of VND15 trillion (US$717.7 million) were conducted, but just VND314 billion ($15 million) worth of bonds were sold. All were sold at a 10-year term with an interest rate of 11.5 per cent per year – the ceiling rate for Government bonds set by the Ministry of Finance during the last 18 months.

Having completed 40 per cent of its bond sales target in the first two months of this year, the Ministry of Finance was unwilling to offer bonds at a higher ceiling rate, and investors balked.

Meanwhile, trading in the secondary bond market was also expected to continue dreary, according to a recent forecast by Bao Viet Securities Co.

Analysts said low liquidity was one of the factors discouraging foreign investors from participating in Viet Nam’s bond market. During the global financial crisis in 2008, foreign investors had great difficulties selling Vietnamese bonds and were forced to discount them in order to withdraw money from the market.

Economist Vu Dinh Anh said the worsening trade deficit and high inflation, interest and exchange rates, particularly the loss in value of the dong, had continued to drive foreign investors away. These factors had reduced the competitiveness of Viet Nam’s bond market in attracting foreign investors compared to those of other countries, Anh said.

In March, foreign investors were absent from most bond auctions on the primary market, while their trading on the secondary market accounted for only 7 per cent of total market value. In 2010, their participation averaged 28 per cent.

Viet Nam Bond Market Association general secretary Do Ngoc Quynh said foreign investors remained concerned over economic factors, yield rates, credit ratings, the scale of market development, business costs, and the nation’s incomplete infrastructure and legal systems.

The value of the domestic bond market equaled just over 15 per cent of national GDP last year, compared to 51.4 per cent on average in other East Asian countries, Quynh said. To further develop the market, the Government should develop a comprehensive plan with specific targets for the bond market, Quynh added. — VNS

Tags: Vietnam Bond Market